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HFT Scourge Exposed (Again): Options Quote Spam At The Open Has Quadrupled In 3 Years

Tyler Durden's picture




 

In the last 3 years, the volume of options quotes (not trades) in the first few seconds of the US equity market's open has exploded. From around 1 million quotes in the first second of the day in 2011, Nanex' detailed animation shows that volumes are now reaching 4 million quotes. Does this quote spam look like it provides liquidity? Wondering why the opening price action in US equity markets has become incredulous in recent months - with vertical dump-and-pumps - wonder no more... 'efficient' markets indeed...

 

Via Nanex: (@NanexLLC)

Each line shows the number of option quotes each second over the first 20 seconds of trading for 1 day.

The animation adds 1 new day per frame to show the growth.

The range of dates is January 2011 through January 9, 2014. 

 

 

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Sun, 01/12/2014 - 20:43 | 4325786 Skateboarder
Skateboarder's picture

The algo's name is definitely "Morning Wood."

Thank you Tyler. I love the HFT Nanex videos. It's like watching a horror flick.

Sun, 01/12/2014 - 20:52 | 4325826 negative rates
negative rates's picture

Yea, I see the sun set too, but I don't see it rise.

Sun, 01/12/2014 - 21:12 | 4325871 wintermute
wintermute's picture

Simple solution. Every quote or order should be active for a minimum of 2 seconds, cancels rejected within that time. This is so trivial for exchanges to implement. If regulators mandated it then no exchange would have an "advantage" of allowing HFT quote-stuffing/spamming.

Sun, 01/12/2014 - 22:10 | 4326042 Papasmurf
Papasmurf's picture

An even better solution would be to introduce a random delay of between 2 and 10 seconds so that co-locating at the exchange offered no unfair advantage over other market participants. 

Mon, 01/13/2014 - 00:14 | 4326337 wintermute
wintermute's picture

I like that a lot. That is a refinement definitely needed.

Sun, 01/12/2014 - 22:29 | 4326083 pndr4495
pndr4495's picture

The simple can contain the complex , but the complex cannot contain the simple.  There is no advantage for the HFT firms in building simple machines.  For them the more complex and the more byzantine the machine or algorithm the more advantageous is the GUI , middle end , and back end as tools to manipulate the markets and the less well armed market participants.  How this maker/ taker " for profit " exchange trading environment makes for more efficiency eludes me.  Truth can be covered up only so long , and it is beyond ludicrous that Tradeworx and Narang won a contract to supply the SEC with surveillance analysis.   "The secret of a great success for which you are at a loss to account is a crime that has never been found out, because it was properly executed." - Balzac 

Mon, 01/13/2014 - 00:20 | 4326348 wintermute
wintermute's picture

Essentially, HFT is an arms-race, a Darwinian survival of the fittest. This is completely at odds with level playing-field markets enabling efficient price discovery.

Regulators are afraid to challenge the status quo because it curtails vested interests. The system is corrupted and broken, but we knew that long ago.

 

Sun, 01/12/2014 - 20:45 | 4325803 blindman
blindman's picture

is there an option quote spam derivative market
to invest in somehow/where? that sounds like a
potentially lucrative diversion or occupation
to me. meanwhile ..
.
.."On January 11, 2002 Enron Online was auctioned off by a bankruptcy court. These same bankers now circled around the Enron carcass. The Warburg family-controlled investment bank UBS Warburg was awarded the company for a price of $0, agreeing to share Enron Online profits with another Wall Street vulture -Lehman Brothers. [11]
On October 7, 2002 now-retired Texas Senator Phil Gramm was rewarded for the deregulation frenzy which he and his Enron board member wife Wendy helped create. Gramm was named Vice-President and partner at UBS Warburg. Lehman went under in 2008, leaving the Warburgs firmly in command."
.
The Warburg Family and Enron
by Dean Henderson
(Excerpted from Chapter 9: The Texas Oil Mafia: Big Oil & Their Bankers…)
http://www.veteranstoday.com/2014/01/09/the-warburg-family-and-enron/

Sun, 01/12/2014 - 20:54 | 4325834 negative rates
Sun, 01/12/2014 - 20:44 | 4325805 Grande Tetons
Grande Tetons's picture

All of this math can hurt the brain. It is best to think of the Fed as Barney Rubble and Fred Flinstone as an HFT algo. 

http://www.youtube.com/watch?v=-D50bjRjwHc

Easier, eh? 

Sun, 01/12/2014 - 20:53 | 4325832 i_fly_me
i_fly_me's picture

"Defense network computers. New... powerful... hooked into everything, trusted to run it all. They say it got smart, a new order of intelligence. Then it saw all people as a threat, not just the ones on the other side. Decided our fate in a microsecond: extermination." -- Kyle Reese, Sergeant Tech-Com, DN38416

Sun, 01/12/2014 - 21:01 | 4325851 q99x2
q99x2's picture

Maybe they can teach it to eat globalists.

Sun, 01/12/2014 - 21:29 | 4325918 deflator
deflator's picture

IYt is amazing how accurate George Orwell was/is...

 I remember in1984 the government/corporate conglomeate havining cameeras and microphones at amazing levels of clarity.

 

 The governmetn gets the technology first and only when there is orders of magnitudes of difference (between whar rhegovernment has)is when said technology is allowed to be distributed to the privare sector.

 are alwayays under surveillance bitchez/////

Sun, 01/12/2014 - 22:08 | 4326036 TaperProof
TaperProof's picture

i've gotten boned by this more than once....  it is very annoying

Sun, 01/12/2014 - 22:10 | 4326041 Clowns on Acid
Clowns on Acid's picture

The number of option quotes per second haqs a direct correlatiopn with the changing of underlying price (Duh..) however, NOT to undermine Tyer's thesis here, but the rise of number of quotes per second in optoins going from 1MM / sec in 2011 to 4MM / sec in 2014 could have to do with more strike prices per underlying stock name as well.

Given the vertical ramp in a lot of stocks from 2011 to 2014, the number of additional strike prices prices have increase as well. Please remember that ALL strike prices regardless of how out of the money they are (value unchanged) ....are repriced and republished (quoted) as the price of underlying changes.

Are there 3 times as many strike prices in 2014 as there were in 2011 ?  Dunno but the QQQ has effectively doubled and many of the high flyers momo, no profit Tech stocks, have been 5 baggers.

 

Sun, 01/12/2014 - 23:21 | 4326213 nflux
nflux's picture

in addition to more frequent strike prices, the addition of weekly options would likely account for some of this but definetly not all

Mon, 01/13/2014 - 00:33 | 4326385 Colonel Klink
Colonel Klink's picture

And here I thougth quote stuffing was illegal according to the SEC!

Mon, 01/13/2014 - 01:35 | 4326485 JailBanksters
JailBanksters's picture

I just wished they'd change the name

It's certainly NOT Investing nor is it Trading, it is High Frequency Stealing

Mon, 01/13/2014 - 08:08 | 4326747 KrugerrandFan
KrugerrandFan's picture

High frequency theft ;-)

Mon, 01/13/2014 - 09:06 | 4326819 mrdenis
mrdenis's picture

oops....... FAT fingers 

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